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New Principles for Impact Investing- Interview with IFC’s Neil Gregory

The International Financial Corporation (IFC) is a Development Finance Institution (DFI) which invests in commercial products to end poverty and promote sustainable prosperity across the globe. In an attempt to advance the sustainable investing industry, the IFC has been developing a set of 9 Operating Principles for Impact Management in collaboration various industry actors. BlueOrchard was glad to contribute to the development of these principles and to be among its first signatories on April 12, 2019. In order to understand how the principles will influence the Impact Investing industry, the Blended Finance and Impact Management team at BlueOrchard interviewed Neil Gregory, Chief Thought Leadership Officer at the IFC.

Neil, what was the rationale behind the creation of the IFC Operating Principles, and why now?

“The IFC has seen a big change in impact investing. With larger investors entering this market, the industry has the potential to attract significantly more funding and to scale up its activ­ities. In this context, the concerns regarding impact washing become even more relevant. IFC has seen this as an opportunity to clarify the issue and has decided to capitalise on its more than 60 years’ experience as an impact investor by sharing key elements of its im­pact system with a coalition of impact investors. IFC has reached out to as many as 1,000 investors and decided to lead a process of standardisation of good impact management practices. IFC aims to define and standardise impact management work by developing a set of principles that allow various players to integrate them into their own impact pro­cesses. As ICMA becomes the standard for green bonds, we envisage the IFC’s Operating Principles being adopted as the standard by impact investors across the board.”

To what extent would you expect these principles to become mainstream and help with the standardization of impact management procedures across the impact investing industry?

“There is appetite in the market for standardization, as many impact investing practitioners are still competing for who has the best impact management practices. IFC’s consultation has aimed at being as inclusive as possible in order to create a set of principles that would be embraced by a large group of investors, asset managers and advisors. We expect to have a good cross section of the market –debt and private equity- to be following the Principles. This would encourage more new capital into the market. The Principles have been designed to keep some flexibility on how these are then implemented by different actors. The IFC wants to be inclusive to allow both small fund managers and sophisticated impact investors to follow the heart of the Principles. The Principles should fit the needs and purposes of a wide-range of different actors.”

What are the challenges you expect in the implementation of the Principles? Do you consider the concrete adoption of the Principles as a target in the mid-term or as a reality from day 1?

“There has not been a lot of discussion about Principles 1 to 8, as these already mirror how many investors and asset managers are implementing their investment processes. On the other hand, we received a lot of questions on Principle 9 (independent verification). During the consultations, it has emerged that the independent verification is seen as the biggest challenge. It is clear that impact investing actors see the added value of independent verification and recognize that this brings credibility. However, devil is in the details. Namely, how can this be cost-effective, and how verification changes depending on the specifics of the business, asset class, portfolio size, etc. It will be interesting to see how the signatories will implement this Principle, as each investor can do so in a different manner. What the IFC is advocating for is “transparency” and “independence” of the review process. The information will be included in the disclosure statement and investors will have to describe how this verification is done, what is the model they follow, who is responsible, and how often this verification is undertaken.”

The IFC promotes the achievement of the SDGs through its two main goals: “ending extreme poverty by 2030 and boosting shared prosperity”. As an impact investor, BlueOrchard also focuses on realizing the SDGs through its funds and blended finance work. Private investors are a necessary source of funding to achieve these global goals. Do you think the Principles can help unlocking commercial capital from private investors to accelerate the SDGs?

“This was initially one of the aims of the Principles. It is our expectation that bringing greater clarity to this industry will incentivize more asset owners and mainstream investors to put capital in the market. In terms of blending, the area with the most potential is with those investors looking for a full commercial mandate. However, the IFC has seen just as much interest for the Principles from development finance institutions, bilateral agencies, and multilaterals as from banks, institutional investors, and asset managers. The blending of capital from these different parties could happen more easily if they share a common impact management practice by following the Principles.”